Market Power and Collusion in the Ocean Shipping Industry: Is a Bigger Cartel a Better Cartel?

Clyde, Paul S., Reitzes, James D., Economic Inquiry

I. INTRODUCTION

The ocean shipping industry enjoys certain conditions that are extremely favorable for collusion, such as antitrust immunity for explicit pricing agreements, known as conference agreements, and enforcement of those agreements by the U.S. government. Consequently, studies(1) purporting to show evidence of price discrimination in ocean shipping were considered, by some, proof of the obvious: the ocean shipping industry exercises market power due to its unique regulatory environment. Policymakers presume that collusive behavior pervades the industry, as evidenced by Senator Metzenbaum's statement that "... the American people simply can't afford to give ocean shipping conferences unbridled discretion to raise prices, reduce capacity, neutralize low-cost competitors and eliminate services to ports or other customers."(2) Thus, the conventional view is that liner conferences act as effective cartels. If this view is correct, then the cartels should become more effective as they face less competition from outsiders that have refrained from joining the cartel. We test this hypothesis by examining how liner conferences behave as their competitive position changes.

Ocean shipping has a truly unique regulatory structure, reflecting fears about destructive competition and excess capacity that have existed since the late 1800s. At that time, joint price-setting behavior among ocean carriers became a common practice. Antitrust immunity for joint pricing agreements has been formally provided by U.S. legislation since 1916; policymakers granted that immunity in exchange for active regulatory supervision.(3) Under the current regulatory structure, defined in the Shipping Act of 1984, each route contains a conference that consists of all carriers choosing to participate in an explicit joint pricing agreement which is free from antitrust action.(4) Some carriers typically choose to remain outside the pricing agreement; these carriers are known as independent carriers. Conferences must be open, so that any carrier may join or exit a conference with limited notice and without explicit penalties.

Both conferences and independent carriers are required to file their rates with the Federal Maritime Commission (FMC), an agency of the U.S. government. The FMC is charged with monitoring and enforcing the published rates. When the FMC detects secret discounting from published rates by either a conference or independent carrier, it punishes those parties involved by assessing fines.(5) However, conference members are allowed to publicly deviate from the conference rate by publishing their own freight rate on a particular transaction after notifying the conference of their intention to do so. With few exceptions (to be discussed later), conferences prohibit their members from independently entering into contractual arrangements with shippers.

Although the ocean shipping industry's regulatory structure appears conducive to collusion, other aspects of the industry are not hospitable to anticompetitive behavior. First, the absence of statutory restrictions on entry implies that carriers are free to transfer ships from one route to another (or to enter the industry de novo). Secondly, many countries subsidize shipbuilding which industry participants claim results in substantial excess capacity. Lastly, the heterogeneity of both carriers and shippers may impede collusive behavior.(6)

Previous empirical studies have argued that liner conferences effectively collude, based purely on their finding that freight rates increase as the value of the cargo increases. Since ocean shipping is now widely containerized (i.e., diverse commodities are shipped in uniform boxes that are handled in a largely uniform manner), these value-based rate differences are considered evidence of price discrimination by an effective cartel. The major flaw in these tests of collusive market power is that they do not account for costs that may be positively related to the product's value, such as implied damage liability costs or costs related to the quality of service. …

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